June 13, 2012

Spanish bailout secrets

Last weekend we received the news that Spain was ready to receive help from EU to recapitalize their banks.

Interestingly, very few details were unveiled at that time, and until now, no official has been able to present the exact conditions and architecture of these bailout plan.
All that have been said is that Spain will receive up to 100 euro billions, that we be used by their bank bailout bund (FROB) to recapitalize banks. The sovereign will be responsible for the repayment of this credit to the EU, which is increasing pressure over the Spanish bonds yields, and increasing the risk that the country may be in its way to apply also for a rescue of the government. This was a bad move, as it was better to have the ESM/EFSF to recapitalize directly the banking sector, leaving the Spanish government without that surcharge. Maybe this alternative will be adopted when the final agreement is signed between Spain and EU.

So, why all the details of the program are still unknown? The main reason is that the final value of the program is still open, while the audit firms do their jobs evaluating the capital needs of the Spanish banking sector. But, my main guess is that EU doesn’t want to reveal the final conditions before the Greek elections that are due this weekend, on 17th of June.

I believe that Spain will be able to receive some softer conditions than the other members of the PIGS (Portugal, Ireland, Greece and Spain, the acronym is finally complete… or will we have the PIIGS version?!) euro zone sub area. These conditions will quickly become demands from the others PIGS to renegotiate their own terms. As new Greek government will also seek better conditions after reelected, EU could not give up some negotiation margin away. In other words, if UE announced that Spain will pay a interest rate of 3%, Greece (and others) will instantly demand the same treatment. After elections, with the 3% already granted, new demands would emerge. Hiding Spain’s special conditions will give EU scope to have still those cards in the pocket to give them again to Greek as if they are really new Greek conquests.

So, I believe that all those news referring to very favorable conditions to the Spanish deal will be officially announced for all PIGS, after the final deal (if any) with Greeks is also known, hopefully at the European summit, on 28th and 29th of June.
As a final remark, I saw in some news that spain will pay an interest rate of 3% while charging their banks a 8.5% interest rate. This will give some boost to Spain’s Fiscal Budget. This effect is even greater if Spain can have 3 years without interest payments as announced in the same media. With a cash accounting methodology, this will contribute to a reduction of the budget deficit in 80 bps. Similar benefits will be very welcome to Portugal, Ireland and Greece.